Thursday, August 29, 2013

Certain topics seem to be Sisyphean: you do your best to clarify and then, there it is, the boulder of common sense sitting at the bottom of the hill, demanding to be rolled up once again. Elementary issues in macropolicy, like the fact that contractionary fiscal policy is contractionary, exemplify this, but so do the basics of climate change. Here the elements in question are that pricing carbon can go a long way toward avoiding the worst scenarios, that the primary channel is economic substitution, and that good policy pushes out the political limits to action.

Now consider a recent argument that gets all of this wrong. It comes from Jesse Jenkins of The Energy Collective; I was pointed to it by the usually insightful David Roberts, who in this case misses the boat. The Cliff Notes version goes like this:

1. Carbon accumulation in the atmosphere is the result of GDP growth and existing technology.

2. We don’t want to cut GDP growth, so the solution is technological innovation, primarily in energy.

3. Carbon pricing itself can’t accomplish this. The correct price would equal the social cost of carbon (the damage done by emitting an extra ton, monetized), but voters are unwilling to support taxes this high. This is because such taxes would achieve their purpose only through massive cuts in per capita income (GDP).

4. But modest carbon prices will generate revenue. This revenue can be channeled by government into R&D. Just like government-financed research gave us the internet, it can give us the future energy technologies that will put the global economy back within ecological limits.

Almost every detail of this argument is flat-out wrong, and the totality rolls the rock back down the hill and calls it a monument.

Just to give a little more heft to the starting point, read through this excerpt from a letter to the Financial Times by political scientist Roger Pielke Jr., quoted with approval by Jenkins:

Carbon emissions are the product of (a) GDP growth and (b) technologies of energy consumption and production. ... Thus, a “carbon cap” actually means that a government is committing to either a cessation of economic growth or to the systematic advancement of technological innovation in energy systems on a predictable schedule, such that economic growth is not constrained. Because halting economic growth is not an option, in China or anywhere else, and technological innovation does not occur via fiat, there is in practice no such thing as a “carbon cap.”Where carbon caps have been attempted, clever legislators have used gimmicks such as carbon offsets or set caps unrealistically high so that negative effects on GDP do not result and the unpredictability of energy innovation does not become an issue.It should thus not come as a surprise that carbon caps have not led to emissions reductions or even limitations anywhere. China will be no different. The sooner that we realize that advances in technology are what will reduce emissions, not arbitrary targets and timetables for reductions, the sooner we can focus our attention on the serious business of energy innovation.

So what’s wrong?

1. Pielke sows confusion with the word “technologies”. In the standard IPAT decomposition, where Impact equals population times Affluence (GDP per capita) times Technology (impact per unit GDP), technology refers to the technologies in use, due to both how goods are made and what goods we use. This is the relevant definition for understanding carbon emissions. It does not mean “everything we currently know about how to produce stuff”, which is how it is sometimes used by economists. What Pielke is doing is appealing to the logic of the first definition in order to invoke the second. By a type of verbal illusion, he brings us from a recognition that how we produce stuff is crucial to the claim that everything depends on inventing new ways of doing it.

What he leaves out, of course, is substitution. Even with existing “technology”, in the sense of everything we currently know, we have quite a bit of scope for producing things differently and changing the mix of what we produce. We can use fuel-efficient cars rather than guzzlers. We can teleconference rather than fly people to distant locations for meetings. We can build wind turbines and the grid needed to support them rather than more coal or oil infrastructure. There are gobs of opportunities for substitution in a modern economy, and the first purpose of pricing carbon is to make them happen. This is not speculative. Countries like the US, which have lower taxes on energy products, have higher energy consumption per unit GDP than countries, like those in continental Europe, that have higher taxes. There really is a law of demand out there.

2. Innovation responds to prices. When the price of computer RAM collapsed, software companies started cranking out feature-bloated, RAM-intensive products. Funny thing about that. As fossil fuel prices appear to move to higher plateaus, Boeing and Airbus work on more fuel-efficient planes. No one made them do this; it’s how markets work, for better and worse. This is not to say that governments can’t speed up the process by subsidizing research that private firms won’t undertake—of course they can. But we will make a lot more progress a lot faster if carbon is expensive and there are financial incentives to economize on it.

3. The social cost of carbon is a chimera. There is no way to put a credible price tag on a ton of carbon. It’s the wrong way to think about what the problem is. (Insurance is the right way.) This means you can’t denounce carbon pricing because it fails to achieve some sort of “objectively correct” level. It’s simply a tool to be used in conjunction with other tools.

4. There are lots of things that can be done by way of regulation to reduce carbon emissions, but most involve inconvenience. You can force people to change how they build houses or what standards have to be met by appliances, but in practice this means people will have to do things they would not otherwise do. Sometimes that’s not a problem: people often lack information and will be just as happy doing the regulatory thing as whatever they were doing before. Quite often it is a problem: you prevent people from doing something they actually prefer doing. For instance, you can change the parking rules so that people can’t stay more than 15 minutes in a parking space for a large swath of a city. This will force them to use other modes of transportation but it will piss them off. Just as there are limits to the acceptability of carbon prices, there are limits to the acceptability of regulations. You want a mix of measures that pack the most emission reductions within the existing political constraints. As you back off on one mechanism, like prices, you are more vulnerable to the constraints on the others.

5. And now a word about what determines those constraints. Yes, the higher the carbon price the less willing people will be to vote for them. But that constraint can be relaxed by structuring your program to give money back to the citizens in as visible a way as possible. How much relaxation is not known at this point and may depend on other factors as well, but we need all the relaxation we can get. That’s why taking carbon revenues and funneling them to businesses to promote R&D is really counterproductive. (a) Give them back to voters. (b) Don’t give them to businesses, which will get voters even angrier.

6. In any case, the binding constraint today is not the voter but the CEO. The business community wants to fob the cost of pricing carbon and substituting other products and methods onto anyone else they can, so what we get are loophole-ridden systems in countries that have carbon pricing and no carbon pricing at all in places like the US. But that is not about policy design—it’s simply the deep political economic funk we’ve all fallen into. To do anything else, whether about macroeconomics or the climate, we have to find a way out of post-democracy.

Tuesday, August 27, 2013

CNBC has a report based on an "inside White House source" that Obama has all but decided to appoint Summers as Fed Chair and will do it fairly soon in order to calm the unhappy markets, whose voice demanding an early decision has been transmitted by all the VSPs at WaPo and the NYT, etc. "Get a decision soon; we don't care who." See http://www.cnbc.com/id/100988773 .

So, the question is to what extent this is a trial balloon or an effort to mold the outcome and prepare everybody for the worst. It is noted that Summers is still "being vetted," and that while Fed insiders at Jackson Hole seem to know he has the edge, some are still raising doubts, the most trenchant being "Has he devised a strategy to be effective within the institution?" (given his lack of experience with the Fed and his notorious arrogance), along with supposedly some lingering concerns about his links to Wall Street, which certainly do not bother the VSPs pounding for his appointment sooner than yesterday.

OK, so we know that Larry and Barry really bonded back there in the foxhole of the early crisis days of the Obama presidency, and Barry just really wants his guy and is annoyed as all get out that all these whiney economists and liberal politicians, feminists, et al are just not jumping on board with full enthusiasm, with presumably this propensity being strongly encouraged by anti-Yellen Gene Sperling. He is working hard to get us used to what he wants, blankety blank, and we should all just shut up and accept it.

What strikes me as being the really sorry story here is that there are no reports, not even hints of any reports, of him even remotely "vetting" Janet Yellen. We know he barely knows her, but has he even given her a chance? How about having her in for a job interview and discussing her view of the world, the Fed, and so on, rather than just listening to the slimey propaganda of Sperling and the rest of the Rubin cohort that surrounds him? This is what he seriously needs to do before he really makes this decision once and for all. He looks to be on the verge of making a really big mistake otherwise.

Thanks so much for your thoughtful and prompt reply. I appreciate
your purpose to, as you say, "give a more nuanced interpretation
of the legitimate concerns surrounding the impact of rapid
technological [change] on job opportunities." My point was
actually that invoking the lump-of-labor canard poses a hindrance
rather than a help to achieving that laudable objective, which I
share. As I wrote, my intention was not so much to dispute your
arguments about technology and employment or even about the
lump-of-labor notion itself as to bring to your attention the
positive contribution that could be made by giving a fair hearing
to the actual views of those who are worried about technological
unemployment.

I didn't "miss" your point at all, instead I chose to avoid piling
a gratuitous critique of your conclusion on top of my main
criticism of your premise. But since you asked... I would
characterize your outlook and prediction as fitting neatly into
Keynes's category of "too easy, too useless a task if in
tempestuous seasons they [economists] can only tell us that when
the storm is long past the ocean is flat again." Your "too easy,
too useless" outlook and prediction flows seamlessly from the
unexamined premise of viewing labor as a commodity. Karl Polanyi
argued that such a description of labor is "entirely fictitious"
yet actual markets are based on this fiction.

An alternative description of labor is as a commons, or to use the
late Elinor Ostrom's term, a "common-pool resource." The words and
actions of ordinary workers, trade unions and even
machine-breakers make a great deal more sense from the perspective
of treating labor as a common-pool resource rather than as a
commodity. By contrast, the inane assumption attributed to workers
by their detractors is itself predicated on the unstated
assumption of the unquestionable commodity status of labor.
Profoundly different policy implications flow from the two
contrasting assumptions, as do fundamentally different predictions
about the future. It seems to me that a "more nuanced
interpretation of the legitimate concerns..." would seek to
include both the common-pool resource and the commodity
interpretations of labor rather than to exclusively feature the
latter while inadvertently disparaging the former by attributing
it to a belief in a spurious fallacy.

I'm only scratching the surface here. I could go into much more
detail and provide extensive reference on the question of viewing
labor as a commodity versus viewing it as a common pool resource
but life is short and I don't want to annoy you with unsolicited
"singing lessons."

The following excerpt is from an article,"How Technology Wrecks the Middle Class" by David Autor and David Dorn, that appeared today in the New York Times "Opinionator." Contrary to the article's assertion, there was no group of 19th century English textile artisans who called themselves the Luddites.

In the early 19th century a group of English textile artisans calling themselves the Luddites staged a machine-trashing rebellion. Their brashness earned them a place (rarely positive) in the lexicon, but they had legitimate reasons for concern.

Economists have historically rejected what we call the “lump of labor” fallacy: the supposition that an increase in labor productivity inevitably reduces employment because there is only a finite amount of work to do. While intuitively appealing, this idea is demonstrably false.

Here is my response to Autor and Dorn's article:

Dear David A. and David D.,

As you both no doubt are aware, I have written the only peer-reviewed, historical examination of the alleged lump of labor fallacy and have concluded that there is no evidence that those accused of supposing that the amount of work to be done was a fixed quantity -- whether they be labelled Luddites, trade unionists, French Socialists or "populists"-- ever believed any such thing. In fact most assertions avoid specifying exactly who is being alleged to commit the fallacy. It is rather inconvenient to have an idea without a thinker who actually thinks the idea.

When the supposed opponents of such an anonymous, supposed thought are similarly only vaguely identified as "economists," then we appear to have a phantom calling out a specter. I can name two actual economists who explicitly refuted the fallacy claim -- Maurice Dobb and A. C. Pigou. Can you name any "economists" who offered substantive evidence for the "supposition" of a fixed amount of work (by evidence, I mean the citation of something said or written by somebody that indicates they held the alleged belief)?

You may be surprised to learn that this claim of a fallacy preceded the Luddites by over 30 years. Dorning Rasbotham, a Lancashire magistrate, made the claim in a pamphlet titled, "Thoughts on the Use of Machines in the Cotton Manufacture." True to the eventual custom, Rasbotham declined to name the "they" who allegedly said there was "a certain quantity of labour to be performed."

My point in bringing all this to your attention is not simply to contradict your arguments about technology and employment. I think there is something much more important at stake here. You see, when you put words in other peoples' mouths or put thoughts in their heads that are not their words or their thoughts, you close off the possibility that they may have actually had different words and thoughts and that those unheard but genuine words and thoughts may be infinitely more interesting and relevant than the ersatz "words" and "thoughts" that you have attributed to Luddites, trade unionists or whomever.

Perhaps economists suspect that what working people say and think couldn't possibly be as profound as what economists (or 18th century gentry magistrates) think? Historians have looked into the matter, though. Folks like Eric Hobsbawm and E. P. Thompson. For example, there are over 2,000 citations for Thompson's 1971 article, "The moral economy of the poor in the eighteenth century." Over 8000 citations to Thompson's 1963 book, The Making of the English Working Class, in which Thompson sought to "rescue the poor stockinger, the Luddite cropper, the "obsolete" hand loom weaver, [etc.]... from the enormous condescension of posterity."

But why should economists be concerned with what either Luddites or economists actually historically thought when they can more handily just recite something some textbook author wrote in 1948 that paraphrased something some textbook author wrote in 1924 that paraphrased something some hack journalist wrote in 1871 that reiterates something some polemical Whig wrote in 1832 that parrots something a gentry magistrate wrote in 1780?

You wrote,

In the early 19th century a group of English textile artisans calling themselves the Luddites staged a machine-trashing rebellion. Their brashness earned them a place (rarely positive) in the lexicon, but they had legitimate reasons for concern.

Economists have historically rejected what we call the “lump of labor” fallacy: the supposition that an increase in labor productivity inevitably reduces employment because there is only a finite amount of work to do. While intuitively appealing, this idea is demonstrably false.

Monday, August 26, 2013

Paul Krugman channels WSJ's Joe Wiesenthal on the argument that the impending debt ceiling is a more dangerous situation for the world economy than the impending taper by the Fed, with Krugman also supporting Wiesenthal in arguing that using the trillion dollar coin gambit to overcome the debt ceiling if Congress does not raise the debt ceiling in time to avoid a default, http://krugman.blogs.nytimes.com/2012/08/26/the-taper-versus-the-crazy . Let me deal with the taper matter at the end of this post, but let me deal with the trillion dollar coin business first.

Now it is true that Krugman sort of ridicules the trillion dollar coin shenanigan, showing a pic of one with Dr. Evil from Austin Powers pictured on it, and many comments on his post suggesting all sorts of absurd figures to be on it. But in the end he does seem to endorse it as the way to deal with the Congressional threat to fail to raise the debt ceiling unless Obamacare is defunded or whatever blackmail they attempt to impose on Obama as a price for raising the debt ceiling. As I and others have previously pointed out, and Obama seems to understand, caving to any serious demand on this debt ceiling nonsense simply encourages more of this in the future. While Obama has been loudly declaring he will not negotiate, it is pretty obvious that he really does need some stick to wave at the Congress if they persist. In then end, Krugman agrees with Wiesenthal that having Treasury coin a trillion dollar platinum coin that gets deposited with the Fed, allowing more borrowing by the Treasury is the way to go.

Well, except there is a major problem with this. Both the Treasury and the Fed must go along with the scheme and follow through in order for it to be effectuated. Unfortunately, at the beginning of this year both bodies made it clear that neither was willing to do any of this, despite legal interpretations that suggest it can be done (initially enacted to allow minting platinum coins of vague denominations for collectors). This was reported by Ezra Klein, www.washingtonpost.com/blogs/wonkblog/wp/2013/01/12/treasury-wont-mint-a-platinum-coin-to-sidestep-the-debt-ceiling . So, maybe the Treasury can be ordered by the president to mint the coin, but he has no authority or ability to order the Fed to do anything about this if they do not want to. Maybe he could cut a deal with Yellen, but, well, even that may not work.

So, this leaves basically only one other option other than playing through a full chicken game with irresponsible Tea Party lunatics in the House: declare the debt ceiling unconstitutional based on the 14th Amendment or related arguments. However, there is this minor problem that Obama has previously declared that he does not accept the unconstitutionality of the debt ceiling, drawing on arguments from his former Harvard law prof, Laurence Tribe. But many others have argued that it is unconstitutional, including former President Bill Clinton. If the loonies take over the House, Obama will need to change his mind on this matter, since it will be nearly impossible for him to get Treasury and Fed to go along with the trillion dollar coin game, and there is no other option.

Regarding the taper, while nobody knows what will happen given that we are in a completely unprecedented situation, it is quite possible that we have already seen much of the impact of the taper. Interest rates have already jumped a point in anticipation of it, with the outcome being mostly serious problems in developing nations such as Indonesia, India, and Brazil. I did not foresee this, and I am not sure who did, so it is not like the taper is all that painless. But we may be seeing much of the pain already, with the likely outcome of actually doing it being more of this. At least for the US, Krugman and Wiesenthal may be right that defaulting on the debt would be worse than the taper, although a really sharp jump in interest rates in the US would probably be even more damaging for all those countries already suffering from those induced by the anticipation of the ending of the the QEs.

I am sorry that it seems that my links are not working here, although they worked when I typed them in separately. However, they do say what I say that they say.

Mirowski’s thesis is that there is an intellectual cabal at the center of modern history, a Neoliberal Thought Collective centered on the Mont Pellerin Society. These conspirators have built a vast network of ideological foggery, with the Pellerinistas at the center and various academic programs, think tanks, publications and so on making up the outer layers. They engage in willful dissimulation, strategic obfuscation and lots of other nefarious latinates to overrun the feeble cognitive and political defenses of the rest of us. Neoclassical economics has largely joined neoliberalism at the hip, especially since the 1980s, so it has been taken along for the ride. This in turn explains why economic orthodoxy has emerged unscathed from a crisis which ought to have ravaged it.

I am no defender of what Mirowski describes as the neoliberal cabal, but I found his screed to be almost uniformly unenlightening. This is a shame, because he has hit the mark often enough in the past.

Above all, I think his idealist interpretation of history is wildly off the mark. Forgive me if I point out that I appear just once in his footnotes (more than I expected) and that his reference is not only completely misleading but revealingly so. The citation is to my 2011 post “It’s the Political Economy, Stupid!”. Mirowski seems to think that it is about disagreements within economics and expresses a naive view that, in the absence of material interests, it is in the nature of science to produce unanimity. But take a look. The point back then, and certainly the same point today, is that the dominance of orthodox economic policies is not attributable to the outcome of some intellectual battle of wits, but to the fact that the same individuals and interests that were in control of the political economy pre-2008 are in control today. And so the message that Mirowski missed is exactly the one that fingers the central flaw in his analysis: the intellectual maneuvers of neoliberal academics is interesting but second- or third-order at best in explaining why events have transpired as they have. The category of power is all but absent in Mirowski’s ostensibly hyper-radical account.

Dig deeper and it gets worse. Mirowski has always had a tendency to substitute purple descriptors for systematic argument, but now the problem is way, way out of control. Just look at his section near the end on neoliberal responses to climate change. Neoliberals, he says, think that markets are the solution to everything, and this is why they favor baroque systems for trading carbon permits. They know that this will have no impact on atmospheric carbon concentrations and this is fine with them, all in line with their secret agenda. Um, I am on record here as being strongly opposed to the use of offset markets to undermine carbon policy, but (1) we do have a market economy and absolutely need to have stiff prices for carbon to get traction, and (2) the gutting of carbon markets is essentially about political economy, the power that business interests have to exempt themselves from meaningful control.

Ah, but the next stage of the neoliberal playbook, according to Mirowski, is to propose a radical “solution” whose purpose is simply to provide a giant profit opportunity. In the case of climate change, that’s the role of geoengineering: it’s a neoliberal ruse to crank out more money for the corporations. But wait: where is the market for geoengineering? Isn’t this a quintessential state initiative? Do you really think that governments intend to sit back and let private firms tinker with the planet on their own? And where do the profits come from, if not from government budgets? How could there ever be a private market in deflecting sunlight or other public goods/bads? And now get ready for this one: Mirowski says that the inner, inner, really inner core of neoliberalism is the idea that human knowledge is helpless in the face of the complexity of nature and society, while markets are wise and trustworthy. Grant him this if you want, but then ask, How can the crusade for geoengineering be an expression of the futility of human knowledge to manage the mysteries of nature?

Well, now I’m the one who sounds shrill. And a lot of my hostility comes from disappointment. I thought that about 60-70% of Machine Dreams was pretty damn good. You get maybe a tenth of that this time around.

Wednesday, August 21, 2013

The Washington Post is at it again, the Washington newspaper of record, with a front page story by Zachary A. Goldfarb, "Allies of Fed candidates wage battle behind scenes." However, the vast majority of the story quotes supporters of Summers, including Tim Geithner and Brad DeLong, with discussion of how various other figures associated with the current or past Dem administrations are organizing themselves with the consent of Summers to make his case. The tone throughout is that he is under an unfair attack and has simply been very constrained in not responding until now against all this unreasonableness. Furthermore, the attacks are coming from "liberals" who want regulation and "doves." Obviously Very Serious People need to put this unruly crowd in its place.

So, only about 5 out of the 27 paragraphs discuss Yellen in a positive way at all. The only person quoted defending her and commenting on how the White House is simply ignoring her and not interviewing her is, of course, another woman, Christina Romer, although it is mentioned that Alan Blinder is supporting her. But, hey, women, doves, sissies for regulation, these are not the serious Wall Street types and policymakers who are joining together to defend the unfairly attacked Larry Summers, poor thing. There is not the remotest hint that the overwhelming majority of the economics profession is supporting Yellen over Summers. All I can think is that these WaPo reporters are pathetic puppies wanting to keep their access to the White House open and are thus parroting the lines handed out by Sperling and others. After all, Obama likes this guy. Why is everybody not going along?

The one other note in the article that suggests maybe somebody in the White House needs to stop playing these games is the announcement that a Republican senator, Pat Roberts of Kansas, has come out against Summers, declaring that "I wouldn't want Larry Summers to mow my yard." This suggests that indeed Larry may have problems that Janet would not have, and that Obama really does not need. OTOH, in another post elsewhere, apparently neutral Jared Bernstein has declared that he does not want to see either Summers or Yellen mowing his lawn, :-).

Barkley Rosser

Update, a few hours later, let me add a few more comments.

1) A further angle that the WH gang led by Sperling is pushing in their quest to be the VSPs supporting the oh-so serious Larry Summers is that it is only ignorant extremists from both ends of the political spectrum who would be so silly as to support Janet Yellen. Pat Roberts from the GOP is obviously a joke with his comment about mowing yards, and, well, on the Dem side is just those leftist libs who oppose free trade and all sorts of other reasonable things who cannot see how wonderful the brilliant Larry is. Sorry, folks, but this will not fly.

The propagandists pushing Summers must deal with the fact that is that indeed the sentiment among the vast majority of the econ profession supports Yellen, across methodological and ideological spectra. The gang supporting Summes is a tiny minority, most of whom are closely connected with each other, but who are treated with equal weight in the WaPo accounts, much as with the old story about how flat earthers are given credit in the media with round earthers. As it is, this consensus is dismissed as "blogosphere noise" (obviously disgusting and to be repudiated).

2) Brad DeLong.

I am not going to pick on Brad. I have told him in public that I respect that he is loyal to his old friend and coauthor and coworker, Larry Summers, and I continue to hold to that. I am someone who values personal loyalty and friendship above many many things. He has been furiously blogging recently in Larry's favor, even repeating today on FB his Aug. 1 bottom line favoring a "fabulous five," which even had three women among it, no sexist Brad! (besides Yellen, Romer and Tyson). The fifth was the openly pro-Yellen Alan Blinder, although he missed the still Obama-officially designated third choice, Don Kohn.

So, what is Brad's argument at the bottom line? He treads a careful line, being a member of the same department as Yellen and her husband (now emeritus) George Akerlof? He says that he supports Summers just barely over her. She is clearly acceptable, as are any others of his top 5, but nobody else (sorry, Don). He is in fact never able to find any actual clear fault with her, but in the end it gets down to this vague argument that Summers is more creative and innovative than she is, that in a very serious crisis, she will just represent worn out doctrines and established ideas, whereas he will find new wonderful solutions.

I am sorry if I find this argument unsatisfying. On his blog I have pointed out that Summers's management of the Asian crisis was criticized by many, including Joe Stiglitz, with him simply pushing the now-seriously-revised Washington Consensus of austerity on nations with current account and budget surpluses, with many of them suffering deep declines and slow recoveries for years afterwards, e.g. Indonesia.

The record is clear that in fact Yellen has the better forecasting record than Summers, for all his loudmouth bravado. The extreme demo of this was the WSJ account recently where on one day the editorial page made the supremely stupid argument that appointing Yellen would lead to a supposedly awful "female-backed currency," when on the next day the front page news section demonstrated that she had the best forecasting record of any of the top 14 figures in the Fed, including Bernanke. While Summers was not in that study, it did not take more than about two seconds to figure out that he would have struggled to be above the middle on that list.

Sunday, August 18, 2013

But no modern user of IS-LM forgets that the diagram must be drawn for a given expected rate of inflation, and that large changes in expected inflation can make a big difference. In fact, that’s precisely the insight that lies behind calls for a higher inflation target, so as to avoid hitting the zero lower bound! But my other reaction is, what are these inflation expectations you speak of? Oh, wait, I seem to remember — didn’t they come on 5 1/4 inch floppy disks? The fact is that we’ve had low, fairly stable inflation expectations for a generation now. I know that there are economists for whom it’s always 1978, who are constantly fearing — or, I suspect, in their innermost selves, hoping — for a return of the good old days when inflation was a constant threat. But in the world we’ve been living in this past quarter-century or more, inflation expectations haven’t moved much, and nominal interest rates have, in practice, been a pretty good guide to the stance of monetary policy.

My only issue with his post was his use of the Michigan survey as it suggests that inflationary expectations have been just over 3% for the past decade or so. While I understand why one would use this survey if one wanted to present a measure that covers the past 35 years, we do have market measures from January 2003 to today. Over this period, the Michigan survey measure has averaged 3.2%, while the difference between the nominal rate on 5-year government bonds and the real rate (as measured by the 5-year TIPS rate) has been only 2%. Andrea Pescatori and Timothy Bianco discussed alternative measures of inflationary expectations a few years ago:

Inflation expectations play a crucial role in monetary policy making. Not only do they tell policymakers something about the real expected cost of borrowing and hence the viability of investment plans, they also help policymakers gauge the public’s perception of the central bank’s commitment to maintaining a low and stable rate of inflation. Especially in the current policy environment, where the Fed has been forced by events to take unconventional actions, it is more important than ever to make sure that long-run inflation expectations are well anchored and that the policy message is well understood by the public.In principle, expectations are not observable. But there are at least two sources that can be used to infer them: surveys and market-based information.

In their discussion of the Michigan survey for 5-year forecasts, they note:

Given the longer horizon, we might be surprised to see that the recent median inflation expectation is quite stable around 3 percent, which is higher than the actual inflation comfort zone of 2 percent–2.5 percent described often by the Fed. In part, this might reflect a bias due to the fact that, when people think of the CPI, they put less emphasis on the prices of goods they buy less often, like durable goods. At the same time, the prices that have decreased the most in the last few decades have been exactly those for durable goods. Moreover, it is also true that the forecasts vary substantially, which may be in part because each individual consumer perceives inflation in terms of his or her own personal consumption bundle.

One of the reasons I bring this up relates to something else that Paul Krugman noted:

The alleged justification for chain-linking is that the conventional consumer price index overstates true inflation; it might overall, but probably not for seniors. In any case, however, as Matt points out, the very same Republicans who claim that Social Security benefits should be cut because the CPI overstates true inflation also insist that the Fed must stop quantitative easing, despite the absence of any visible inflation threat, because the real inflation rate is much higher than the official statistics indicate.

Since a lot of economists point to the market measures, which suggest inflation expectations are currently less than 2%, I’m surprise these Republicans who criticize the FED haven’t been screaming that the Michigan survey data indicates a higher expected inflation rate. Never mind that over the past 10.5 years, the average increase in the CPI has been only 2.36%. And remember that these same Republicans think this is some sort of overstatement.

Saturday, August 17, 2013

"How many Virginians does it take to change a light bulb?
Five: One to change the bulb and four to talk about how great the old bulb was."

I think I am turning into my late father, a conservative in the old traditional way of defending existing institutions and practices. Here I go, about to defend Fannie Mae and Freddie Mac, whom all Very Serious People know should go as soon as possible. President Obama thinks they should go, and we have two bills in Congress that will lead to that outcome, one in the Senate co-sponsored by Dem Sen. Warner of VA (my state) and Rep Sen. Corker of TN, both VSPs in good standing, while in the House Banking Chair Hensarling (R-TX) also has such a bill.I mean wow, we have both the president and VSPs from both parties in Congress on this. It must be great. I mean, we all know that they were responsible for all the problems in the housing market that led to you know what!

Well, except maybe not. Buried in the Saturday Real Estate section of the Washington Post today we have Kenneth Harley raising some questions. Yes, indeed, both of these entities are most certainly open to serious criticism. To varying degrees they have had histories of mismanagement and even corruption. They were buying lots of subprime mortgages at the peak of the housing bubble. Republican critics even claim that they were prime instruments in getting the whole bubble going because they supposedly pressured banks to lend to inappropriate poor minority home buyers under pressure from Clinton, although most observers do not buy this case. Furthermore, they essentially went belly up with the bust and needed to be bailed out by a government takeover. The case looks pretty strong for at least reforming them, if not outright getting rid of them.

However, Harley notes that they are now making money and paying off their loans. Furthermore, not only have they been funding many housing market deals during these recent years of a desperately weak housing market, they were the only entity in the US that was doing so at the pit of the crash (a point Harley does not make). Indeed, Harley reports that "Economists at Moody's Analytics estimate that dumping the companies and switching to a plan advocated by Sens. Bob Corker (R-Tenn) and Mark Warner (D-VA) 'would increase the interest rate for the average mortgage borrower' by one-half to three-quarters of a percentage point." And, it should be noted that in contrast to the Hensarling plan in the House, the Corker-Warner plan actually does propose putting in place a housing market equivalent of the FDIC to provide insurance for housing lenders in the absence of the evil Fannie and Freddie. Presumably the rates would go higher under the no-backdrop-at-all-plan of Hensarling.

In short, Harley accurately notes that not only is there no agreement on what should replace Fannie and Freddie, the available evidence suggests that the more reasonable of the serious alternatives out there is more likely to hurt the housing market than help it, at least in the short run. They may be bums, but it is not at all clear that any available alternative will not be worse, quite possibly a whole lot worse.

Indeed, not only were they the only entities around doing any lending whatsoever in the housing market after the crash, but they only got dragged into financing subprimes late in the bubble due to the pressure from the fact that they were technically private entities supposedly out to make money, and they were not making as much money as the other lenders who had been playing the subprime racket for years before they got into it in 2005. If they had been fully state-owned entities with the goal of stabilizing the housing market, they might well have stayed out of that entirely.

Which leads me to a bottom line that will not go over well with most opinion makers in Washington, probably not even Kenneth Harley, but which looks obvious to me. Rather then eliminating them or returning them to their semi-private status where they are supposed to make money, increase the degree of state ownership and mandate them to play the roles that they were set up to play in the beginning (and Fannie goes all the way back to the New Deal), to act as backdrops and stabilizers of the US housing market. Obama has said he wants to preserve the 30-year mortgage, but Harley hints that this may not happen with any of the currently proposed alternatives. It is indeed the case that most nations lack such mortgages. It was Fannie Mae that allowed the creation of them. So, return Fannie and Freddie to their original functions and increase their backing from the state rather than reducing it. Heck, their positive profits (at least for now) can even help further lower the budget deficit that most Americans do not even know is declining.

While President Obama is still conveniently off vacationing on Martha's Vineyard, the Washington Post has a front page story today on Janet Yellen and her candidacy to replace Bernanke as Fed Chair. I feel a bit odd being in agreement with so much of the economics profession for once, although I have been out in front since at least 2009 when McBride of Calculated Risk and I were the only ones urging her for Chair back then. Anyway, looking closely at this article, which appears on the surface to be favorable, I see a lot of input from pals of Summers trying to undercut her at points.

The article is by Neil Irwin and Ylan Q. Mui, entitled "Solid analytics a boon in contender to lead Fed: Vice Chair Yellen is well-versed in labor markets." Well, so far so good and accurate to boot. Indeed the article does point out her excellent track record in analyzing economic trends as well as her deep and excellent scholarly record in publishing about labor markets, certainly something most relevant in this slow recovery with job growth continuing to be pathetically weak. Various prominent economists are quoted praising her, from former Fed Vice Chair Alice Rivlin (eeeeek! a woman! does not count!) through John Williams (eeeek! her successor as SF Fed President! does not count!) to even people one might assume might not be favorably inclined towards her due to her "dovish" rep (signaled in the article by noting "She has been a strong intellectual force within the Fed, a tough taskmaster for staff and single-minded in her desire to push down joblessness. She has been less inclined to wring her hands over the risks that the Fed's easy-money policies could create new bubbles or stoke inflation"). So, even uber-hawk Allan Meltzer offers some faint praise: "She was perceptive about the problems in the housing industry, but she did not have a major role in the crisis." And so we begin to get this subtle dinging along with the praise.

This last gets to something important for the decisionmaking process by Obama, and here is where this article is playing its little game. Obama has signaled that he admires Summers because of his supposed role in handling crises, and pro-Summers people have leaked all these concerns about whether or not Yellen has the "gravitas" to handle one. Here we have Meltzer in effect saying that she may have been right (and she was a lot more right than Summers about pretty much anything they disagreed on), but the nice studious girl just never was really in charge when the shit hit the fan the way good old boy Larry was, even though he messed things up quite a bit when he was so in several places, such as Harvard.

There are some other dog whistle bleeps that are in here playing to those in the White House and nearby who will be whispering in Obama's ear on his return from Martha's Vineyard about how Larry really is better than Janet. We get reports of her losing turf fights with Gene Sperling when she was CEA Chair under Clinton, given that "The CEA is meant to provide the president with the best advice the economics profession can offer, even when that advice is politically infeasible. It is instead the National Economic Council, headed then and now by Gene B. Sperling, that typically weighs economic arguments against political concerns and practical realities," There you go, for all her Fed experience, she is just an impractical academic out of touch with political realities, and Summers pal Sperling will be pounding this message to Obama hard and clear. Sure, in the next paragraph Yellen is defended by Laura Tyson in that is the nature of the deal with being CEA Chair, but, heck, Tyson is just another girl like Rivlin and thus obviously lacking in sufficient gravitas, donchaknow?

We are then told about how she is not quite the team player that many of us have presented her as, presumably an offset to the same charge being made about Summers. Unlike her predecessors as Vice Chair (and current dark horse candidates for Chair) Don Kohn and Roger Ferguson, she has not played "the trusted deputy" of the Chair. She has "acted more as an independent force within the institution" (eeeeeeek! an independent female force!). She has favored certain staff members over others, and she "has had an often tense relationship with Daniel Tarullo," the Fed governor overseeing bank regulation. According to one official, "They both have big egos and big personalities," and Tarullo "was an Obama campaign adviser and the president's first appointment to the Fed, and he has remained close with former colleagues in the White House." So, no doubt, while it is just fine for Larry Summers to have a big ego, a supposedly get-along type like Yellen cannot have one (although maybe this also suggests that she might just have a bit of, ahem, "gravitas"), and presumably Tarullo will be filling Sperling's ears with tales of her hubris to tell to Obama.

Finally, we have a reminder that in the end she is just another good girl who does her homework whom we should not really take seriously. While Bernanke speaks "extemporaneously from a couple of bullet points, Yellen drafts scripts of exactly what she will say, people who have been in the room said, and reads them word for word." Eeeeeek! She might be as bad as that president who supposedly only can speak if he has a teleprompter to read from!

Wednesday, August 14, 2013

"If anyone wants to argue that Milton Friedman is now unimportant to modern economics, that's like saying Bob Dylan is unimportant to modern music." - Stephen Williamson

Why, yes, but to someone as familiar with the more obscure parts of Dylan corpus as I am, this is more than just an analogy. Here I just skim the surface of Dylan's discography:

"Talkin' Optimal Quantity of Money Blues"
"The Lonesome Death of Interest Rate Targeting"
"Love Minus 2% Money Growth- No Limit"
"Stuck Outside of NAIRU, With Those Accelerationist Blues Again"
"It Takes a Train to Laugh, and A Permanent Income To Consume"

I know, none of these are well-known. Deep Bootleg - the Sub-Basement Tapes, if you know what I mean. But hey, how many times have you belted out the first line of one of his best-known tunes, "I Ain't gonna work on Maynard's Farm No More!" - didn't you ever wonder about the reference?

Monday, August 12, 2013

These guess-who-said-it exercises are pretty much obsolete in the internet era; you can just look up the quotes online, in somewhat the same way you might do a plagiarism search. So no prizes will be awarded, and you don’t have to rush to post the correct answer in the comments. This is purely for your own edification.

Probably it is true enough that the great majority are rarely capable of thinking independently, that on most questions they accept views which they find ready-made, and that they will be equally content if born or coaxed into one set of beliefs or another. In any society freedom of thought will probably be of direct significance only for a small minority.

Saturday, August 10, 2013

Let’s begin with one of these greedy workers. Or maybe he was one of the people who fret about the workers’ pensions?
Maremont, Mark. 2013. “For McKesson’s CEO, A Pension of $159 Million.” Wall Street Journal (25 June): p. B 1.http://online.wsj.com/article/SB10001424127887323998604578565491579124154.html
“Executive pension plans sometimes grow to a hefty size, amounting to
tens of millions of dollars, as extra retirement cushions for
long-serving CEOs.”
“Then there’s the record $159 million pension benefit of John
Hammergren, the current chairman and CEO of drug distributor McKesson
Corp. MCK –0.93% That’s how much he would have received in a lump-sum
payment had he voluntarily departed on March 31, McKesson disclosed in
its annual proxy filing on Friday.”
“Compensation consultants say it’s by far the largest pension on file
for a current executive of a public company, and almost certainly the
largest ever in corporate America. It’s also more than double the value
of the 54-year-old Mr. Hammergren’s pension six years ago.
“Mr. Hammergren has been at McKesson for 17 years, 12 of them as sole
CEO, so he is significantly younger and has a shorter tenure than most
other executives who have accumulated large pensions.”
“A giant pension plan was at the heart of a controversy a decade ago
over the pay package of Richard Grasso, former chairman of the New York
Stock Exchange. An outside investigation found that Mr. Grasso had
amassed pension benefits with a lump-sum value of $126 million.”
My mistake. He was probably one of those who groused about workers’ pensions
Or How About the Big Money People who Handle their Pensions?
Braun, Martin Z. and Chris Christoff. 2013. “Detroit’s Pension Funds
Dogged by Bad Deals.” Bloomberg Businessweek (28 July): pp. 42-44.http://www.businessweek.com/articles/2013-07-25/detroits-pension-funds-dogged-by-bad-deals
They detail how the Detroit pension plans have lost more than $10 million on each of several deals with shady characters.

So, President Obama has made some vague promises to review current policies about NSA surveillance and possible limits on it, appointing some committee to make recommendations, although the FISA court was already supposed to be those experts keeping a leash no NSA from just watching and listening to everybody and everything. This looks not only like too little too late, but that his heart is really not into it. He has by far the worst record of any US president of any for prosecuting leakers, and making the US look like the old USSR in doing so with such stuff as actual torture of Bradley Manning, etc. see Juan Cole on how bad all this is see http://www.juancole.com/2013/08/reassurances-surveillance-reassuring.html . That Edward Snowden has ended up defecting to Russia may be surreal, but it may also be appropriate.

Which brings me to Cold War redux. OK, so Putin has been very badly behaved over a long period of time on many issues and has even engaged in clearly personal insults of Obama, including his own pulling out of a one-on-one summit last year at Camp David. His latest walking against the spreading global movement for LGBT rights sticks out like a sore thumb, and Obama mentioned it. But it is all too clear that Obama's recent pullout from a one-on-one with Putin was triggered by Putin finally granting Snowden protection. Heck, while all sorts of opinionmakers and policy wonks think Obama is right to do this, it is opposed by 56% of the US population, and libertarians as well as many others have no sympathy with Obama on his defense of massive bugging.

I am not sure why Obama is so obsessed with all this secrecy and NSA megadata gathering. Juan Cole speculates that it is a combination of fear of a Cheney mole in the intel estabishment or just fear of being dinged by Republicans in Congress if there is a terror attack on US soil that he could have stopped with this all-out bugging and mass surveillance. I do not know, and of course, there may really be some Awful Truth he knows, but Cannot Tell US, although I doubt it seriously.

While I think all this should be cut back drastically, including the 16 (at least) intel agency establishment, it is also the case that this stuff has basically been going on for much longer than most realize, even though it was drastically expanded with the Patriot Act and its exanded interpretations, and that there was some cutback for awhile after the 1975 Church Committee. Nevertheless, anybody who read the 1983 The Puzzle Palace by James Bamford should have known that NSA was even back then essentially gathering at least all international phone calls into and out of the US, generally scanning them for key words, reportedly. An old paranoid like me (who had a father with the same last name who was so high in NSA he appeared in The Puzzle Palace) has ever since assumed that anything I say or write or post or whatever pretty much anywhere will be picked up and observed and stored, although little of it would be worth the time for anybody to actually read or listen to (and it is one thing to have your phone calls or emails picked up and stored and another for them to be actually listened to or read by a human being, even if NSA HQ at Fort Meade is now larger than the Pentagon, and NSA has thousands of employees).

Let me make a final point on how ridiculous so much of this is, particularly all this over-emphasis to the point of torturing people on secrecy about this stuff. OK, so maybe we don't want to let terrorists know just how we are listening to them, although any of them who do not know are probably stupid. But the hard fact is that most of our real or presumed enemies know way more than does the US public about all this, including almost certainly the Chinese and the Russians. Let me illustrate this with a bit of my own personal ancient history.

So, even more secret than the NSA is the National Reconnaissance Office (NRO), whose budget is reputedly on the same scale as NSA's, several times that of CIA's, although with many fewer employees (those spy satellites cost a lot of money). Anyway, I first visited the then USSR in March, 1984, when I would meet my later wife for the first time. On arriving at the National Hotel in Moscow, a tsarist era gush not too far from Red Square, there was a copy of the English language Moscow News on a table in the reception area. At this time the existence of the NRO was classified and far less known than the NSA's. Nevertheless, the top headline on the front page was a story about something the NRO was doing; I do not even remember what it was, although I think it had to do with naval activities. In any case, I suspect that there is not much on those four laptops Snowden was reportedly carrying that is not already known by the relevant Russian organs.

Sunday, August 4, 2013

This is an extract from a book that Vincent Portillo and I
are writing, The Matrix: An Exploration of the Interactions between the Economy,
War, and Economic Theory.

Here is how
it starts:

In the late nineteenth century, a fear about
the softness of American society raised doubts about the capacity of the United
States to carry out its imperial destiny.This problem was associated with the final settlement of the
frontier.As important as the
development of open space was to the expansion of the territory of the United
States, the completion of the continental expansion brought an attendant fear
that traditional masculinity was on the wane and would bring about a withering
of the individual and the national body.This fear spread to the church as well, where the result was thought to
be a moral softening (Miller 2011, p. 38).To make matters worse, waves of immigrants from Southern and Eastern
Europe were flooding American cities with foreign cultures.This concern became so pressing that talk of
"race suicide" became common.

Saturday, August 3, 2013

Obama has thrown the Fed Chair race into a tizzy with his posing former Vice Chair, Donald Kohn, as the third person under consideration to succeed Chairman Ben at the Fed, along with Janet Yellen and Lawrence Summers. Pretty clearly he likes and wants Summers and is ticked that the trial balloon for Summers resulted in a massive and widespread denunciation of him and fervent defense of Janet Yellen and her candidacy. He and his Summers-Rubin-cronies advisers have had to beat a strategic retreat, noting no decision until fall.

As it is, I think that the Kohn balloon is not for real. This is a scam to advance the candidacy of Summers over Yellen. Well, maybe not a total scam. Clearly Kohn's vast experience at the Fed makes him a serious candidate. But he has advantages that Yellen has, that vast experience at the Fed especially, an issue that has been used against Summers. So, bringing him in presumably undercuts Yellen by drawing off support from the hardcore Fed crowd. Furthermore, he has a reputation for being more conservative than Summers, if that descriptor even means anything anymore in connection with the Fed. Given that Yellen is being labeled as a liberal dove who is backed by the liberal wing of Dem senators (with the WSJ whining about the danger of a "female-backed currency," eeeek!), this makes Summers the centrist, supposedly making him acceptable to liberals if Kohn appears to be the real alternative to Yellen.

So, there it is. I think that Gene Sperling has convinced Obama that bringing in Kohn will help the candidacy of Summer, and I think they may be right. The game is getting dirtier by the minute.

Friday, August 2, 2013

The Employment Report noted that the unemployment rate fell last month to 7.4% and here is Brad’s reaction:

An Unemployment Rate Edging Down Because Participation Fell Is Not Good News ... Employment-to-population ratio unchanged is a labor market treading water. 162K payroll jobs is not an establishment employment gain that makes me think it is time to "taper".

Although he is right the usually excellent kharris left this comment:

The civilian labor force fell 37k, but household employment - HOUSEHOLD EMPLOYMENT - rose 227k. So the unemployment rate decline was overwhelmingly the result of rising employment, not falling participation.

I guess we should note that population tends to rise over time. But here’s the funny thing – while the June to July change is as Brad notes, the May to July change shows that the net change in the labor force participation rate (LFP) was zero while the employment to population ratio (EP) edged up. Rather than focus on the month to month noise, take a look at our chart over period since 2006, which both the period when unemployment skyrocketed and this recent decline. Most of the decline in the unemployment rate was from a falling participation rate with the employment to population ratio up from 58.2% at its lowest to the current 58.7%. So I score this one with Brad.